Since 1994, Enterprise Investment Schemes (EIS) have been an important tool in the investors’ kit, but many potential investors worry that EIS-eligible businesses are too high risk. Here, Craig Harman, a tax specialist at Perrys Chartered Accountants, explains everything you need to know about Enterprise Investment Schemes, and the tax savings you might be missing out on if you’re not getting involved.
A government-backed initiative, the Enterprise Investment Scheme was designed to encourage individual investors to buy shares in higher-risk companies by offering generous tax reliefs to those who invest. To be eligible for funding under the EIS, a business must be within seven years of its first commercial sale, not have gross assets worth more than £15 million before shares, and have less than 250 full-time employees. It’s true that investing in less established businesses may carry a greater investment risk. However, there is the potential for higher returns and the tax relief available can minimise any loss should the worst happen.
Income tax relief
Of all the benefits of investing in an EIS, one of the most attractive is the income tax relief you can receive. You can claim relief for a maximum annual investment of £1 million, or £2 million if you have invested in a knowledge-intensive company. You can claim for up to 30% of your investment, meaning that you could receive up to £300,000 tax relief a year – or £600,000 for investments in knowledge-intensive companies. This is one of the most generous tax relief schemes currently on offer in the UK.
Of course, returns are not guaranteed when investing in early-stage companies, and indeed most investments carry an element of risk. However, the EIS provides attractive loss relief at your marginal tax rate. When you combine this loss relief with the income tax relief you receive when investing in an EIS eligible company, you greatly reduce the amount of capital you have at risk.
They support small/medium businesses
Since its launch in 1994, the EIS has been pivotal in helping small to medium, new starter companies in the UK achieve vital growth capital. Over the last two decades, the scheme has helped EIS businesses access billions of pounds which might otherwise have been ploughed into lower risk companies. The EIS stipulates that those receiving investment under the scheme must use it to grow their business – increasing revenue, customer base and number of employees. This means that you can be sure that your investment is helping small businesses to thrive, while providing valuable jobs and services to local communities.
Profits are tax free
Another initiative of the EIS are the Capital Gains Tax advantages. For most non EIS investments, any returns will be liable for Capital Gains Tax (CGT) above the CGT-free personal allowance. When you invest in an EIS, provided you meet the conditions, all growth in value is exempt from CGT, meaning you can achieve a greater net profit, while saving your personal allowance for other investments.
The use of the scheme is subject to detailed conditions. Therefore, it is important these are met otherwise your investment may not qualify. If you have any doubts, it is best to seek advice from a specialist EIS accountant.